Medidata is still overpriced even after earnings miss: Rotblut

The buzz over cloud computing has pushed stocks in that business past reasonable valuations, particularly Medidata Solutions, which is overpriced even after badly missing third-quarter expectations, a situation that has Charles Rotblut, editor of AAII Journal, tagging the stock as his “Sell of the Week.”

Appearing on MoneyLife With Chuck Jaffe, Rotblut said Medidata
“whiffed on earnings expectations,” reporting earnings of 24 cents per share when analysts expected 31 cents. With a price-to-earnings ratio of 31 and a price-to-book ratio of 8.6 and revenues rising 21%, Rotblut said there is no denying that the company is going strongly, but noted that the growth rate is already priced into the shares.

“Everything in the market has a price, and that’s the key point, that you always want to pay a reasonable price for a stock,” Rotblut said, “and when you have a company that is missing analyst estimates – you’re seeing analysts cut their estimates down by a significant margin – you don’t want to pay a high premium for the stock.

“People are looking at the stock saying ‘It’s a cloud company, therefore I am going to pay more,’” Rotblut added, “but at the end of the day you are paying for growth and right now the stock is priced well above its growth prospects.”

Rotblut noted that Medidata Solutions has enough momentum to hold off a downturn for awhile, but he noted that with the industry median P/E at 21, a downturn of 40% is possible if the stock lives up to the signs it is showing of reverting to the industry mean. At this point, he said, the downside risk is greater than the potential rewards in the stock.

“The market is never going to tell you that you are being left holding the hot potato,” Rotblut said. “You are better off taking profits away than staying in the stock too long.”

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